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Brands that maintain a sense of luxury will be successful.

Skin care is one of the more resilient categories, partly because companies have continued to invest in new technologies.

Direct sales has proven to be an area of unexpected growth.

Savvy brands are employing a mix of complementary channels.

Retailers may see niche as more of a risk, but there is a genuine need to have something new and interesting.

Beginning with the collapse of banking giant Lehman Brothers in September 2008, global economies have been on a roller-coaster ride. No consumer market has escaped unscathed, although the so-called “lipstick factor” may have helped cushion the beauty industry. The theory goes that the beauty industry and sale of beauty products does not suffer as severely as other industries or products when the going gets tough. As early as the Great Depression during the 1930s, while the U.S. gross domestic product nose-dived, cosmetic sales increased—suggesting that consumers were and are unwilling to give up on life’s little luxuries—regardless of how bad things may be. Further, it was Leonard Lauder who is credited with coming up with the term lipstick factor, which claims that during tough economic times sales of color cosmetics grow while consumers rein in spending on big-ticket items such as cars and electrical goods.

So, did this theory hold water during the most recent economic downturn? Well, yes and no. At the end of 2008, Euromonitor International* noted that North America and Asia (particularly Japan) had suffered the most, and that premium brands were particularly hard hit. “Globally, the industry took a knock, but we have noticed that consumers are ready to try [less expensive] brands, whereas in the past there had been a taboo about budget beauty,” said Euromonitor analyst Irina Barbalova, head of beauty and personal care, Euromonitor International. She notes the success of rock-bottom priced ranges from Primark, TK Max, Supderdrug and Aldi. However, cheapness is not enough. “Brands that can keep the luxury feel will be successful,” she claims. “Consumers want added value at lower prices, but are looking for quality.”

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Another recent trend, large brands have also made efforts to launch less-expensive lines that offer some of the same R&D and ingredients as the higher-cost lines. L’Oréal’s Youth Code ($16), for example, relies on much of the same R&D and gene technologies as L’Oréal-owned Lancôme Génifique ($60). “L’Oréal’s luxury division has been suffering. It makes sense to balance it out with masstige offerings,” suggests Barbalova.

Skin care appears to be one of the more resilient categories, partly because companies have continued to invest in new technologies, especially in antiaging. “Skin care is still the engine behind the industry, and is consistently one of the better performers,” says Carrie Mellage, director, consumer products, Kline & Company.

By contrast, fragrance has had difficulty keeping pace. “Fragrance perpetually suffers, as [its success relies on] department stores,” Mellage says. According to Kline, the weak economy has forced the department store share of the total market down two points compared to 2003 levels. Mellage believes this decline has prompted both brand owners and retailers to actively engage customers with purchase incentives, loyalty programs and even direct sales. Brands such as Lancôme, Estée Lauder and Clarins have stepped up marketing of direct sales with online enticements, including bonus gifts and free shipping with purchase.

There are signs that the economy is looking up and that, perhaps, the worst is behind us. Lancôme, which was looking lackluster earlier in 2009, for example, saw Asian sales rise by 18% in September 2009. Meanwhile, Elizabeth Arden posted a profit of $40 million in a recent quarter. In fact, many signs are reason for a great deal more optimism than one year ago.

Growth Areas: Alternate Categories and Niche

Direct sales has proven to be an area of unexpected growth, posting a robust 8.6% increase in sales, according to Kline, and nearly double that of the total market. Growth has been driven partly by the earnings potential and expanding sales force—those looking for work in a difficult job market. Internet sales have also contributed to channel growth. Kline notes growth has more than doubled in the past five years as consumers have become increasingly comfortable making online purchases. “Savvy brands are employing a mix of complementary channels—including online sales, catalogs and social networking—to maximize their reach and target consumer in the format that’s most comfortable for them,” explains Karen Doskow, industry manager for consumer products research at Kline.

Online has also favored the smaller niche brands, which are often the first to feel the cold winds of a downturn.

Sian Sutherland, founding partner-chief, Mama Mio,* believes that the layers of padding protecting larger companies can actually make them more unwieldy. “During the past year, I’ve come to appreciate the advantages of being small. We can be more reactive and more nimble than big companies whose marketing plans are set for [an entire] year,” she asserts, pointing out that a 10% flux either way is not a big deal for small brands. “We are fortunate that our rate of growth has been 50% per year,” she adds.

But don’t retailers stick to the bigger, more reliable brands when the economy is shaky? “Retailers may see niche as more of a risk, but there is a genuine need to have something new and interesting.” Mama Mio’s distribution in the U.S. and U.K. is also diverse—including spas, department stores such as Fred Segal and Harvey Nichols, and hotels —notably Ritz Carlton, Claridges and Browns.

U.K. department store Debenhams is a new outlet for Mama Mio, and Sutherland recognized that she needed to do something different to stand out. “The cost of supporting a brand in department stores is substantial, so we put in one SKU in a way that shouts.” The display for the brand’s skin care for breasts consists of two oversize breasts encased in a bra with “Boob Tubes” nestling in the cleavage. “For a niche brand to survive, you have to celebrate that you are niche and not play by the rules,” says Sutherland. However, her most important advice for niche brands is: “You need to have a strong point of difference and communicate it simply and clearly. For the savvy consumer, marketing spin is paper thin.”